When you want finance against used commercial vehicles you think of Shriram Transport Finance. If you want a loan against Gold, you either think of Manappuram Finance or Muthoot Finance. Srei Infrastructure or IDFC have created a niche for themselves in infrastructure financing, while Bajaj Finance has reinvented lending against consumer durables. Welcome to the world of NBFCs (Non-Banking Finance Corporations)!
NBFCs have been competing with and complementing banks in the growth of the economy over the past few decades. No wonder that they have been regarded as 'Shadow Banks' by the financial stability board (FSB).
Though regulated by the RBI, they do not enjoy the comfort of going to the central bank "as the lender of last resort" in times of crisis unlike banks. They have evolved in terms of their operations, reach and profitability, and have been taking on the mantle of banks in the new ecosystem in the recent past.
Borrowers prefer them over banks due to their faster decision-making ability, prompt provision of services and expertise in niche segments like truck finance, consumer durables or gold loans.
What is an NBFC?
An NBFC is a company registered under the Companies Act, 1956, and undertakes activities similar to that of a bank like accepting deposits and lending loans and advances. However, they cannot do the following:
nNBFCs cannot accept demand deposits
nNBFCs cannot issue cheques drawn on itself
n NBFC deposits are not insured by Deposit Insurance and Credit Guarantee Corporation.
Primarily, NBFCs are mainly categorised into deposit taking NBFCs (NBFC-D) and non-deposit taking NBFCs (NBFC-ND). NBFC-ND have further been divided into two categories based on their asset size - Systemically important non-deposit taking NBFCs (ND-SI) and other non-deposit taking NBFCs (ND-NBFCs).
Protection of depositors' interests has been a dominant objective of the Reserve Bank and, therefore, there has been a conscious move to contain deposit mobilisation by NBFCs-D, and hence, RBI has not given any licence to any deposit taking NBFC started after 1997.
What is the Sectoral Distribution of Credit?
The industry continues to get the major share of credit, though NBFCs have been increasing the exposure to the retail sector in the last couple of years. A recent Crisil report says that NBFCs' share in total credit in India will go up to 19%, from the existing 16%, by 2019, due to the growth of infrastructure sector and construction of highways. A recent development also is that NBFCs have also been giving working capital loans to small and medium enterprises.
Trend in NPA Ratio vis-a-vis banks
There has been a steady deterioration in asset quality of NBFCs in recent years. Gross non-performing assets (GNPA) ratio for NBFCs increased to 4.5% at end-March 2016.
The increase in NPAs was partly due to the change in NPA recognition norms.
Prior to the issuance of the revised framework in 2016, NBFCs had to mark a loan as bad loan, if the interest was not paid for six months, while for banks it is three months.
Now NBFCs have to mark a loan as bad loan, if the interest has not been paid for 90 days or three months. The new guideline will however kick in only by March 2018.
As per the new guidelines, a loan is bad if it was not paid for five months in FY2016, and further reduced to four months in FY17, and three months in 2018. Notwithstanding, the recent deterioration, the asset quality of NBFCs are better compared with banks.
CRAR of NBFCs
Though the CRAR (Capital to risk weighted assets ratio) has been declining in the last few years, it is still way above the prescribed level of 15%, reflecting the soundness of the NBFC sector as compared with banks.
So are NBFCs here to stay?
NBFCs have come into their own in recent years, and have been slowly emerging out of the shadows of banks which are mired in many issues in the wake of increasing NPAs.
NBFCs have brought efficiency in their operations by embracing technology and have been using algorithms and analytics in assessing the credit needs of the borrowers and providing them online lending platforms. To conclude, there is no denying the fact that NBFCs will play a key role in the growth of our economy in the coming years.
(The writer is a CFA and ex-banker, and is currently with
Manipal Academy of Banking, Bangalore)